Anagram

Project report on
Study of Gold as a commodity derivative and Estimating the price trends.
With a special reference to ANAGRAM Stock broking limited.

Prepared For:-

Anagram Stock broking Limited.

Prepared By: -

Pavan Kumar
Under the concerned guidance of:

Mr.Navin & Mr. Sri Krishna

A project report submitted in the partial fulfillment of SUMMER INTERNSHIP PROGRAMME as the requirement for the MBA program.

Hyderabad.

Anagram
List of Illustrations.
Serial no.

Contents
Introduction Derivatives Derivatives existing in India: - Financial Derivative - Commodity Derivatives Indian Derivatives Market Looking Ahead Trading instruments: - Forward Contract - Futures Contract - Options - Swaps Participants In Derivatives Market - Hedgers - Speculators - Arbitragers Trading Of Commodity Derivatives In INDIA - Exchange Trading - Over The Counter Commodity Markets - Global Perspective - Indian Perspective Company Profile: - ANAGRAM STOCKBROKING LIMITED Project Profile: - Commodity for the study-GOLD - Objective - Analysis and Interpretation of the data Suggestions and Recommendations Bibliography

Page no.

1. 2. 3. 4. 5.

3 5 6 7 9 10 12 13 14 16 17 18 19 19 20 23 29 31 32 33 55 62 75

6.

7. 8. 9. 10.

11. 12.

Anagram
INTRODUCTION
Commodities Futures trading! in India have a long history. The first commodity futures market appeared in 1875. But the new standardized form of trading in the Indian capital market is an attractive package for all the people who earn money through speculation by trading into FUTURES. It is a well-known fact and should be remembered that the trading in commodities through futures exchanges is merely, old wine in a new bottle. The trading in commodities was started with the first transaction that took place between two individuals. We can relate this to the ancient method of trading i.e., BARTER SYSTEM. This method faced the initial hiccups due to the problems like: store of value, medium of exchange, deferred payment, measure of wealth etc.. This led to the invention of MONEY. As the market started to expand, the problem of scarcity piled up. The farmers / traders then felt the need to protect themselves against the fluctuations in the price for their produce. In the ancient times, the commodities traded were the Agricultural Produce, which was exposed to higher risk i.e., the natural calamities and had to face the price uncertainty. It was certain that during the scarcity, the farmer, realized higher prices and during the oversupply he had to loose his profitability. On the other hand, the trader had to pay higher price during the scarcity and vice versa. It was at this time that both joined hands and entered into a contract for the trade i.e., delivery of the produce after the harvest, for a price decided earlier. By this both had reduced the future uncertainty. One stone still remained unturned- surety of honoring the contract on part from either of the parties. This problem was settled in the year 1848, when a group of traders in CHICAGO came forward to standardize the trading. They initiated the concept of to-arrive contract and permitted the farmers 3

Anagram
to lock in the price upfront and deliver the grain at a contracted date later. This trading was carried on a platform called CHICAGO BOARD OF TRADE, one of the most popular commodities trading exchanges today. It was this time that the trading in commodity futures picked up and never looked back. Although in the 19th century only agricultural produce was traded as a futures contract, but now, the commodities of global or at least domestic importance are being traded over the commodity futures exchanges. This form of trading has proved useful as a device for HEDGING and SPECULATION. The commodities that are traded today are: Agro-Based Commodities Wheat, Corn, Cotton, Oils, Oilseeds etc.. Soft Commodities.. Coffee, Cocoa, Sugar etc Livestock. Live Cattle, Pork Bellies etc Energy.. Crude Oil, Natural Gas, Gasoline etc Precious Metals.. Gold, Silver, Platinum etc Other Metals Nickel, Aluminum, Copper etc
Structure of the commodity market.

Anagram

DERIVATIVES MARKET INTORDUCTION The derivative is a product whose value is derived form the value of one or more variables/underlying assets called bases in a contractual manner. They have no value of their own but derive it from the underlying asset that is being dealt with under the derivative contract. Thus derivate contracts acquire their value from the spot prices of the assets that are covered by the contract. The primary purpose of a derivative contract is to transfer risk from one party to another they have established themselves as irreplaceable tools to hedge against risks in the market. The underlying asset can be equity, forex, commodity or any other asset. The emergence of the market for derivative product, most notably forwards, futures and options can be traced back to the willingness of the risk-averse economic agents to guard themselves against the uncertainties resulting out of the fluctuations in the underlying assets prices. It is because of this nature, that, the markets [financial/commodities] are marked with a higher degree of volatility through the uses of derivative products. The risk of the prices can be transferred fully or partially by, locking-in the asset prices in the form of futures or forwards. 5

Anagram
As an instrument of risk management, these do not influence the fluctuations in the prices of the underlying assets. Infact, by locking-in the assets prices, derivative products minimize the impact of the fluctuations in the asset prices on the profitability and cash flow of the investors. The Indian derivatives market has a history of more than a century, but is still in a nascent stage vis--vis the global derivatives market. Today we have an active derivatives market in the segment of stocks and foreign currency, while the trading in the commodities is just standardized. The OTC derivatives in India are well established and the Indian capital markets have acquired the international flavor and the volumes in the derivatives market in at a pace to climb up. A contract bought by paying an upfront margin is calculated as value added risk (VAR) basis. Which traces the volatility in the underlying assets (stock or commodities) prices to arrive at margin that is reflected of this volatility. Stock futures are linear and are absolutely similar to simple stocks i.e., ideally if the stock goes up and payoff.

DERIVATIVES EXISTING IN INDIA

FINANCIAL DERIVATIVES The term derivatives refer to a large number of financial instruments whose value is derived from the underlying assets. Derivative instruments like the options and futures facilitate the trading in financial contracts. The most important underlying instruments in the market are in the form of Equity, treasury bills, and foreign exchange. The trading in the financial derivatives has attracted the prominent players of the equity markets. The primary purpose of a derivative contract is to transfer risk from one party to another i.e. risk is transferred from a party that wants to get rid of it to another party i.e. willing to take it. The major players seen in the 6

Anagram
derivatives segment are the SPECULATORS whose sole objective is to buy and sell for a profit alone. The HEDGERS are the other breeds of players, who aim merely to have a hedge positions. They are risk free investors whose intention is to have a safety mechanism and wish to protect their portfolio. Nevertheless, they are pursued as a cheap and efficient way of moving risk within the economic system. But the world of derivatives is riddled with jargons making it more awesome. The trading in equity through the derivatives in India was introduced in the year 2000 by the Securities And Exchange Board of India [SEBI] and this was described as the Indias derivative explosion. Although this took a definite form in 2000 but the idea was initiated in the year 1995. it was then in the year 2000 that SEBI permitted the trading the in the options on the platforms of Indias premier exchange platforms i.e., the National Stock Exchange Of India limited [NSE] and The Bombay Stock Exchange [BSE] in the individual securities. But the futures contracts took 17 long months to get launched on November 09 2001. The trading in options and futures in the individual stocks were permitted to trade on the stable stocks only. The small and highly volatile stocks were an exemption from the trade in derivatives. Futures and options are important tools that help the investors to derive profit. The futures facilitate the investor to enter into a contract to deliver the underlying security at a future date whereas, the options allow it to his discretion as to whether he wants to buy (call) or sell (put) the contract. The current trading behavior in the derivatives segment reveals that single stock futures continues to account for a sizeable proportion. A recent report indicates that the trading in the individual stock futures in the Indian exchanges has reached global volumes. One possible reason for such a behavior of the trader could be that futures closely resemble the erstwhile BADLA system. 7

Anagram
COMMODITY DERIVATIVES Commodity market is an important constituent of the financial markets of any country. It is the market where a wide range of products, viz., precious metals, base metals, crude oil, energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop a vibrant, active and liquid commodity market. This would help investors hedge their commodity risk, take speculative positions in commodities and exploit arbitrage opportunities in the market. The need for a futures market in the commodities, especially, in the primary commodities was emphasized because such a market not only provides ample opportunities for effective management of price risk, but also, assists inefficient discovery of prices which can serve as a reference for the trade in the physical commodities in both the external as well as in the internal market. India, a commodity based economy where two-third of the one billion population depends on agricultural commodities, surprisingly has an under developed commodity market. Unlike the physical market, futures markets trades in commodity are largely used as risk management (hedging) mechanism on either physical commodity itself or open positions in commodity stock. There was an effort to revive these markets but all went in vain due to improper infrastructure and facilities. However, after India joined the WORLD TRADE ORGANIZATION the need to protect the agricultural community against the price fluctuations cropped up. The National agricultural policy 2000 was formulated and proposed to expand the coverage of the futures market to minimize the volatility in the commodities prices and hedging the risk arising out of the fluctuations in the prices. As a result of this there is a standardized form of commodity futures trading in

Anagram
the country, today and a lot number of people are active in the commodities exchanges, taking it to a great high. The active players in these exchanges are Traders, Speculators and the Hedgers. It is said that now-a days the prices of the commodities in the Physical Market (Mandis) is derived in accordance to the spot prices in the commodity exchanges.

Table: 1 Turnover in Financial Markets and Commodity Market (Rs in Crore) S No. 1 2 3 I Government Securities Market Forex Market Total Stock Market Turnover (I+ II) National Stock Exchange (a+b) a) Cash b) Derivatives II Bombay Stock Exchange (a+b) a) Cash b) Derivatives 4 Commodities Market 1,544,376 658,035 1,374,405 1,057,854 617,989 439,865 316,551 314,073 2,478 NA (13) (63) (27) (56) (43) 2,518,322 2,318,531 3,745,507 3,230,002 1,099,534 2,130,468 515,505 503,053 12,452 130,215 (4.7) (18.7) (91.2) (84) (136) (117) 2,827,872 3,867,936 4,160,702 3,641,672 1,147,027 2,494,645 519,030 499,503 19,527 500,000 (16.1) (16.7) (91) (124.4) (133.8) (117.1) Market segments 2002-03 2003-04 2004-05 (E)

Note: Fig. in bracket represents percentage to GDP at market prices Source: Sebi bulletin

Indian Derivatives Market . Looking Ahead Clearly, in the nascent stage, the derivatives market in India is heading in the right direction. In the terms of the number of contracts in a single 9

Anagram
commodity/stock it is probably the largest market globally. It is no longer a market that can be ignored by any of the serious participants. The Indian economy, now, is at the verge of greater expansion the any other economies in the globe today. This has attracted a large number of institutional investors, both the Indian as well as foreign, to invest in to the Indian stocks and commodities, thereby bringing in a lot of forex reserves. As predicted by the popular investment Gurus and the great Economists world wide, India will be a major player in the global economy by the end of this decade. We can conclude that, with the institutional participation set to increase and a broader product rollout inevitable, the market can only widen and deepen further.

Trading instruments Derivatives in the recent times have become very popular because of their wide application. Before getting into the hard talks about the commodities trade, let us know about the trading instruments in the derivatives, as they are similarly applicable to the commodities derivatives. There are 4 types of Derivatives instrument: Forward contract Future contract Options contract Swap

Futures and Options are actively used in many exchanges whereas; Forwards and Swaps are mostly trade Over The Counter (OTC). FORWARDS CONTRACT

10

Anagram
A spot or cash market is the most commonly used for trading. A majority of our day-to-day transactions are in the cash market. In addition to the cash purchase, another way trading is by entering into a Forward contract. A Forward contract is an agreement to buy or sell an asset on a specified date of a specified price. These contracts are usually entered between a financial institution and its corporate clients or two financial institutions themselves. In the context to the Commodity trading, prior to the standardization, the trade was carried out as a forwards contract between the Associations, Producers and Traders. Where the Association used to act as counter for the trade. A forward contract has been in existence in the organized commodities exchanges for quite sometimes. The first forward contract probably started in Japan in the early 18th century, while the establishment of the CHICAGO BOARD OF TRADE (CBOT) in 1848 led to the start of a formal commodities exchange in the USA. Forward contracts are very useful in HEDGING and SPECULATION. The essential idea of entering into the forward contract is to Hedge the price thereto avoid the price risk. By entering into a forward contract one is assured of the price at which the goods/assets are bought and sold. The classic Hedging example would be that of an exporter who expects to receive payment in foreign currency after three months. As he is exposed to greater amount of risk in the fluctuations in the exchange rates, he can, with the use of forwards, lock-in the rate today and reduce the uncertainty. Similarly, if a speculator has the information of an upswing in the prices of the asset, he can go long on the forward market instead of the cash market and book the profit when the target price is achieved. The forward contract is settled at the maturity date. The holder of the short position delivers the assets to the holder of the long position on the maturity against a cash payment that equals to the delivery price by the buyer. The price agreed in the forwards contract is the DILIVERY PRICE. 11

Anagram
Since the delivery price is chosen at the time of entering into the contract, the value of the contract becomes zero to both the parties and costs nothing to either the holder of the long position or to the holder of the short position. The salient features of a forwards contract are:

It is a bilateral contract and hence is exposed to counter-party risk. Every contract is unique and is custom designed in the terms of: expiration date and the asset type and quality. The contract price is not available in the public domain. On the expiration, the contract is to be settled by the delivery of the asset. Of the party wishes to reverse the contract, he has to go to the same counter-party, which may result o attract some charges.

FUTURES CONTRACT Financial futures represent the most significant financial innovations of the last twenty years. MERTON MILLER, a noble lauret 1999. The father of financial derivatives is Leo Me lamed. The first exchange that traded in the financial derivatives was INTERNATIONAL MONETARY MARKET, wing of the Chicago Mercantile Exchange, Chicago, in the year 1972. The futures market was designed to solve the problems, existing in the forwards market. A financial future is an agreement between two parties to buy or sell a standard quantity of a specified good/asset on a future date at an agreed price. Accordingly, future contracts are promises: the person who initially sells the contract promises to deliver a specified underlying asset to 12 - As quoted by

Anagram
a designated delivery point during a certain month, called delivery month. The underlying asset could, well be, a commodity, stock market index, individual stock, currency, interest rates etc.. The party to the contract who determines to pay a price for the goods is assumed to take a long position, while the other who agrees to sell is assumed to be taking a short position. The futures contracts are standardized in the terms of: Quantity of the underlying assets. Quality of the underlying assets. Date and month of the delivery. Units of the price quotations and minimum price change, and Location of the settlement.

It is due to the standardization that the futures contract have an edge with the forward contract, in the terms of: Liquidity, safety and the security to honoring the contract which is otherwise not secured in an OTC trading forwards contract. In short, futures contract is an exchange-traded version of the usual forward contract. There are however, significant differences between the two and the same can be appreciated from the above discussion. Benefits to Industry from Futures trading: Hedging the price risk associated with futures contractual

commitments. Spaced out purchases possible rather than large cash purchases and its storage. Efficient price discovery prevents seasonal price volatility. Greater flexibility, certainty and transparency in procuring commodities would aid bank lending. Facilitate informed lending. 13

Anagram
Hedged positions of producers and processors would reduce the risk of default faced by banks. Lending for agricultural sector would go up with greater transparency in pricing and storage. Commodity Exchanges to act as distribution network to retail agrifinance from Banks to rural households. Provide trading limit finance to Traders in commodities Exchanges. OPTIONS CONTRACT Options have existed over a long period but were traded over the counter (OTC) only. These contracts are fundamentally different from that of futures and forwards. In the recent years options have become fundamental to the working of global capital markets. They are traded on a wide variety of underlying assets on both, the exchanges and OTC. Options like the futures are also available on many traditional products such as equities, stock indices, commodities and foreign exchange interest rates etc., options are used as a derivate instrument only in financial capital market in India and not in commodity derivatives. It is in the process in introduction. Options, like futures, also speculative in nature. Options is a legal contract which, facilitate the holder of the contract, the right but not the obligations to buy or sell the underlying asset at the fixed rate on a future date. It should be highlighted that, unlike that the futures and forward contract the options gives the buyer of the contract, the right to enter into a contract and he doesnt have to necessarily exercise the right to give, take the delivery. When a contract is made the buyer has to pay some money as a Premium to the seller to acquire such a right. Options are basically of two types. Call options Put options

14

Anagram
Call options: A call options gives the buyer the right to buy the underlying asset at a strike price specified in the option. The profit/loss depends on the expiration date of the contract if the spot price exceeds the strike price the holder of the contract books a profit and vice-versa. Higher the spot price more is the profit. Put options: A put option give the buyer the right to sell the underlying asset at the strike price specified in the option. The profit/loss that the buyer makes on the option depends on the spot price of the underlying asset. If the spot price is below the strike price he makes profit and viceversa. If the spot price is higher than the strike price he will wait up to the expiry or else book the profit early.

SWAPS: Swaps were developed as a long-term price risk management instrument available on the over-the-counter market. Swaps are private agreements between two parties to exchange cash flows in the future according to a pre-arranged formula. These agreements are used to manage risk in the financial markets and exploit the available opportunity for arbitrage in the capital market. A swap, generically, is an exchange. In the financial parlance it refers to an exchange of a series of cash flows against another series of cash flows. Swaps are also used in the asset/liability management to obtain costeffective financing and to generate higher risk-adjusted returns. With swaps, producers can effectively fix, i.e. lock in, the prices they receive over the medium to long-term, and consumers can fix the prices they have to pay. No delivery of the asset is involved; the mechanism of swaps is purely financial. The swaps market originated in the late 1970s, when simultaneous loans were arrange between British and the US entities to bypass regulatory barriers on the movement of foreign currency .the land mark transaction 15

Anagram
between the World Bank and the IBM in august 1981, paved the way for the development of a market that has grown from a nominal volume in the early 1980s to an outstanding turnover of US $ 46.380tn in 1999. The swaps market offers several advantages like: These agreements are undertaken privately while transactions using exchange traded derivatives are public. Since the swaps products are not standardized, counter parties can customize cash-flow streams to suit their requirements The swaps can be regarded as portfolios of forward contracts. The two commonly used swaps are: Interest rate swaps: These entail swapping only the interest related cash flows between the parties in the same currency. Currency swaps: These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction.

Participants in the derivatives market

There are three major participants in the derivatives market. They are: Hedgers Speculators Arbitragers

HEDGERS He is the person who enter the derivatives market to lock-in their prices to avoid exposure to adverse movements in the price of an asset. While such locking may not be extremely profitable the extent of loss is known and can be minimized. They are in the position where they face risk associated with the price of an asset. They use derivatives to reduce or eliminate risk. 16

Anagram
For example, a farmer may use futures or options to establish the price for his crop long before he harvests it. Various factors affect the supply and demand for that crop, causing prices to rise and fall over the growing season. The farmer can watch the prices discovered in trading at the CBOT and, when they reflect the price he wants, will sell futures contracts to assure him of a fixed price for his crop. A perfect hedge is almost impossible. While hedging Basis risk could arise. Basis = Spot price of asset to be hedged Futures price of the contract used. Basis risk arises as a result of the following uncertainties: The exact date when the asset will be bought or sold may not be known. The hedge may require that the Futures contract be closed before expiration.

PRICE FUTURES PRICE BASIS

SPOT PRICE EXPIRY DATE TIME

17

Anagram
SPECULATORS: A speculator is a one who accepts the risk that hedgers wish to transfer. A speculator takes positions on expectations of futures price movements and in order to make a profit. In general a speculator buy futures contracts when he expect futures prices to rise and sell futures contract when he expects futures prices to fall, but has no desire to actually own the physical commodity. Speculators wish to bet on the future movement in the price of an asset. They use derivatives to get extra leverage. They take positions in the market and assume risk to profit from fluctuations in the prices. Infact, the speculators consume the information, make forecast about the prices and put their money in these forecast. By taking positions, they are betting that the price would go up or they are betting it would go down. Depending on their perception, they may long or short positions on the futures or /and options, or may hold spread positions.

ARBITRAGEURS Simultaneous purchase of securities in one market where the prices thereof is low and sale thereof in another market, where the price thereof is comparatively higher. These are done when the same securities are been quoted at different prices in the two markets, with a view to make a profit and carried on with the conceived intention to derive advantage from difference in prices of securities prevailing in the two markets.
As defined by The Institute of Chartered Accountants of India.

Arbitrageurs thrive on the market imperfections. They profit by trading on given commodities, or items, that are in the business to take advantage of a 18

Anagram
discrepancy between prices in two different markets. If, for example, they see the future prices of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit. Thus, the arbitrage involves making risk-less profit by simultaneously entering into transactions in two or more markets. With the introduction of derivate trading the scope of arbitrageurs activities extends to arbitrage over time i.e., he can buy securities in an index today and sell the futures, maturing in the month or two. Hedgers Vs Speculators
Hedging is the key aspect of derivatives and also its basic economic purpose. In the U.S., the Commodity Futures Trading Commission (CFTC), the futures regulatory authority, while considering proposals for approval of a new derivative product, particularly examines the ability of the product to provide hedging. While the Committee has also emphasized the hedging aspect of derivatives, it fully recognizes that the derivatives markets capacity to absorb buying/selling by hedgers is directly dependent on the availability of speculators to act as counter-parties to hedgers. Hedging will not be possible if there are no speculators. For the above reason, decisions about many aspects of derivatives trading, e.g., contract size, design and duration, would have to strike a balance between the needs of the hedgers and the necessity to attract an adequate number of wellcapitalized speculators who are prepared to take upon themselves the price risk which hedgers want to give up. The fact is that a futures market, to be able to operate and be liquid, should have both hedging participation and speculative appeal. Some studies of futures markets in the U.S. have shown that hedging activity accounts for about 50-60 per cent of the markets total

Trading Of Commodity Derivatives In India Trading of all the derivatives in India is carried over: Exchanges Over the counter EXCHANGE TRADING An asset (commodity/stock), when is traded over an organized exchange is it is termed, to be traded on the Exchange. This type of trading is the general trading which we see on the major exchanges world over. The settlement in the exchange trading is highly standardized. 19

Anagram
OVER THE COUNTER TRADING An asset (commodity/stock) is traded over the counter usually because the company is small and unable to meet listing requirements of the exchanges and facilitates the trading in those areas where the exchanges are not located. Also known as unlisted the assets are traded by brokers/dealers who negotiate directly with one another over computer networks and by phone. Instruments such as bonds do not trade on a formal exchange and are thus considered over-the- counter securities. Most debt instruments are traded by investment banks making markets for specific issues. If someone wants to buy or sell a bond, they call the bank that makes the market in that asset. Exchange Vs OTC Trading The OTC derivatives markets have witnessed rather sharp growth over the last few years, which have accompanied the modernization of commercial and investment banking and globalization of financial activities. The recent developments in information technology have contributed to a great extent to these developments. While both exchange-traded and OTC derivative contracts offer many benefits, the former have rigid structures compared to the latter. It has been widely discussed that the highly leveraged institutions and their OTC derivative positions were the main cause of turbulence in financial markets in 1998. These episodes of turbulence revealed the risks posed to market stability originating in features of OTC derivative instruments and markets. The OTC derivatives markets have the following features compared to exchange-traded derivatives: The management of counter-party (credit) risk is decentralized and located within individual institutions.

20

Anagram
There are no formal centralized limits on individual positions, leverage, or margining. There are no formal rules for risk and burden-sharing, There are no formal rules or mechanisms for ensuring market stability and integrity, and for safeguarding the collective interests of market participants, The OTC contracts are generally, not regulated by a regulatory authority and the exchanges self-regulatory organization, although they are affected indirectly by national legal systems, banking supervision and market surveillance. Commodity Markets Global Perspective The major commodities trading exchanges globally are: Chicago Board Of Trade (COBOT). U.S.A. New York Mercantile Exchange (NYMEX). U.S.A. London Metal Exchange (LME). United Kingdom. Tokyo Commodity Exchange (TOCOM). Japan International Petroleum Exchange (IPE). London Metal Exchange (LME). United Kingdom Sydney Futures Exchange (SFE). Australia Brazilian Futures Exchange (BBF). Brazil Winnipeg Commodity Exchange (WCE). Canada Marche a Terme International de France (MATIF). France Hong Kong Futures Exchange (HKFE). Hong Kong New Zealand Futures & Options Exchange (NZFOE). New Zealand Russian Commodity and Raw Materials Exchange. Russia Singapore International Monetary Exchange (SIMEX). Singapore South African Futures Exchange (SAFEX). South Africa Dalian Commodity Exchange. China

21

Anagram
Shanghai Metal Exchange (SME). China Chicago Board Of Trade (CBOT) The Chicago Board of Trade (CBOT), established in 1848, is a leading futures and options on futures exchange. More than 3,600 CBOT members trade 50 different futures and options products at the exchange through open auction and/or electronically. Volume at the exchange in 2003 was a record breaking 454 million contracts. In its early history, the CBOT traded only agricultural commodities such as corn, wheat, oats and soybeans. Futures contracts at the exchange evolved over the years to include non-storable agricultural commodities and non-agricultural products like gold and silver. The CBOT's first financial futures contract, launched in October 1975, was based on Government National Mortgage Association mortgage-backed certificates. Since that introduction, futures trading has been initiated in many financial instruments, including U.S. Treasury bonds and notes, stock indexes, and swaps, to name but a few. Another market innovation, options on futures, was introduced in 1982. For more than 150 years, the primary method of trading at the CBOT was open auction, which involved traders meeting face-to-face in trading pits to buy and sell futures contracts. But to better meet the needs of a growing global economy, the CBOT successfully launched its first electronic trading system in 1994. During the last decade, as the use of electronic trading has become more prevalent, the exchange has upgraded its electronic trading system several times. Most recently, on January 1, 2004, the CBOT debuted its new electronic platform powered by the cutting-edge trading technology. 22

Anagram
As of January 1, 2004, the Chicago Mercantile Exchange is providing clearing and related services for all CBOT products. New York Mercantile Exchange (NYMEX) The NYMEX in its current form was created in 1994 by the merger of the former New York Mercantile Exchange and the Commodity Exchange of New York (COMEX). Together the represent one of the world's largest markets in commodities trading. It deals in futures (and options) in oil products, such as crude oil, heating oil, leaded regular gasoline, natural gas, propane and in rare metals, such as platinum and palladium. It also deals in gold and silver, aluminum and copper, sharing with the London Metal Exchange a dominant role in the world metal trading. London Metals Exchange The London Metal Exchange is the world's premier non-ferrous

metals market with highly liquid contracts and a worldwide reputation. It is innovative while maintaining its traditional strengths and remains close to its core users by ensuring its contracts continue to meet the high expectations of industry. As a result, it is highly successful with a turnover in excess of US$3,000 billion per annum. It also contributes to the UKs invisible earnings to the sum of more than 250 million in overseas earnings each year. The origins of the London Metal Exchange can be traced as far back as the opening of the Royal Exchange in 1571. This is where metal traders first began to meet on a regular basis. However, it was in 1877 that the London Metal Market and Exchange Company was formed as a direct result of Britain's industrial revolution of the 19th century. This led to a massive increase in the UKs consumption of metal, which required the import of 23

Anagram
enormous tonnages from abroad. Merchant ventures were investing large sums of money in this activity and were exposed to great risk, not only because the voyages were hazardous but also because the cargoes could lose value if there was a fall in price during the time it took for the metal to reach Britain. INDIAN PERSPECTIVE There are three major exchanges for the commodity trading in India. They are: The National Commodities and Derivatives Exchange Ltd. (NCDEX) Multi Commodities Exchange of India Ltd. (MCX) National Multi-Commodity Exchange Ltd. (NMCE) National Commodity & Derivatives Exchange Limited (NCDEX) The National Commodities and Derivatives Exchange Ltd is a professionally managed online multi commodity exchange promoted by ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE). Punjab National Bank (PNB), CRISIL Limited (formerly the Credit Rating Information Services of India Limited), Indian Farmers Fertilizer Cooperative Limited (IFFCO) and Canara Bank by subscribing to the equity shares have joined the initial promoters as shareholders of the Exchange. NCDEX is the only commodity exchange in the country promoted by national level institutions. This unique parentage enables it to offer a bouquet of benefits, which are currently in short supply in the commodity markets. The institutional promoters of NCDEX are prominent players in their respective fields and bring with them institutional building experience, trust, nationwide reach, technology and risk management skills. 24

Anagram
NCDEX is a public limited company incorporated on April 23, 2003 under the Companies Act, 1956. It obtained its Certificate for Commencement of Business on May 9, 2003. It has commenced its operations on December 15, 2003. NCDEX is a nation-level, technology driven de-mutualized on-line

commodity exchange with an independent Board of Directors and professionals not having any vested interest in commodity markets. It is committed to provide a world-class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency. Forward Market Commission regulates NCDEX in respect of futures trading in commodities. Besides, NCDEX is subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations, which impinge on its working. NCDEX is located in Mumbai and offers facilities to its members in more than 390 centers throughout India. The reach will gradually be expanded to more centers. NCDEX currently facilitates trading of thirty six commodities - Cashew, Castor Seed, Chana, Chilli, Coffee, Cotton, Cotton Seed Oilcake, Crude Palm Oil, Expeller Mustard Oil, Gold, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags, Mild Steel Ingot, Mulberry Green Cocoons, Pepper, Rapeseed Mustard Seed, Raw Jute, RBD Palmolein, Refined Soy Oil, Rice, Rubber, Sesame Seeds, Silk, Silver, Soy Bean, Sugar, Tur, Turmeric, Urad (Black Matpe), Wheat, Yellow Peas, Yellow Red Maize & Yellow Soybean Meal. At subsequent phases trading in more commodities would be facilitated.

25

Anagram
Multi Commodities Exchange Of India Ltd (MCX)

MCX

an

independent

and

de-mutulised

multi

commodity

exchange has permanent India for facilitating

recognition from Government of

online trading, clearing and settlement operations for commodity futures markets across the country. Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India, NABARD, NSE, HDFC Bank, State Bank of Indore, State Bank of Hyderabad, State Bank of Saurashtra, SBI Life Insurance Co. Ltd., Union Bank of India, Bank Of India, Bank Of Baroda, Canara Bank, Corporation Bank. Head quartered in Mumbai, MCX is led by an expert management team with deep domain knowledge of the commodity futures markets. Through the integration of dedicated resources, robust technology and scalable infrastructure, since inception MCX has recorded many first to its credit. Inaugurated in November 2003 by Mr. Mukesh Ambani, Chairman & Managing Director, Reliance Industries Ltd, MCX offers futures trading in the following commodity categories: Agri Commodities, Bullion, Metals- Ferrous & Non-ferrous, Pulses, Oils & Oilseeds, Energy, Plantations, Spices

26

Anagram
MCX has built strategic alliances with some of the largest players in commodities eco-system, namely, Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors' Association of India, Pulses Importers Association, Shetkari Sanghatana, United Planters Association of India and India Pepper and Spice Trade Association. Today MCX is offering spectacular growth opportunities and advantages to a large cross section of the participants including Producers / Processors, Traders, Corporate, Regional Trading Centers, Importers, Exporters, Cooperatives, Industry Associations, amongst others MCX being nation-wide commodity exchange, offering multiple commodities for trading with wide reach and penetration and robust infrastructure, is well placed to tap this vast potential. Vision and Mission of the Multi Commodities exchange of India. The vision of MCX is to revolutionize the Indian commodity markets by empowering the market participants through innovative product offerings and business rules so that the benefits of futures markets can be fully realized. Offering 'unparalleled efficiencies', 'unlimited growth' and 'infinite opportunities' to all the market participants. At MCX we believe that performance excellence and affordability would be the key drivers in promoting and popularizing Commodities Futures trading in the country. Exchanges in the new economy will be driven by strong service availability backed by superior technology and MCX is well poised to emerge as the "Exchange of Choice" for the commodity futures trading community The National Multi Commodity Exchange of India ltd. The first state-of-the-art NMCE de-

mutualized Exchange,

multi-commodity commenced

futures trading in 24 commodities on 26th November, 2002 on a national scale and the 27

Anagram
basket of commodities has grown substantially since then to include cash crops, food grains, plantations, spices, oil seeds, metals & bullion among others. NMCE was the first Exchange to take up the issue of differential treatment of speculative loss. It was also the first Exchange to enroll participation of high net-worth corporate securities brokers in commodity derivatives market. NMCE has also made immense contribution in raising awareness about and catalyzing implementation of policy reforms in the commodity sector.. It was the Exchange, which showed a way to introduce warehouse receipt system within existing legal and regulatory framework. It was the first Exchange to complete the contractual groundwork for dematerialization of the warehouse receipts. Innovation is the way of life at NMCE. National Multi Commodity Exchange of India Ltd. (NMCE), promoted by commodity-relevant public institutions, viz., Central Warehousing Corporation (CWC), National Agricultural Cooperative Marketing Federation of India (NAFED), Gujarat Agro-Industries Corporation Limited (GAICL), Gujarat State Agricultural Marketing Board (GSAMB), National Institute of Agricultural Marketing (NIAM), and Neptune Overseas Limited (NOL). The Punjab National Bank (PNB) took equity of the Exchange to establish that linkage. Even today, NMCE is the only Exchange in India to have such investment and technical support from the commodity relevant institutions. These institutions are represented on the Board of Directors of the Exchange and also on various committees set up by the Exchange. The dayto-day operations of the Exchange are managed by the experienced and qualified professionals with impeccable integrity and expertise. None of them have any trading interest. Vision National Multi-Commodity Exchange of India Limited is committed to

provide world class services of on-line screen based Futures Trading of permitted commodities and efficient Clearing and guaranteed settlement, 28

Anagram
while complying with Statutory / Regulatory requirements. We shall strive to ensure continual improvement of customer services and remain quality leader amongst all commodity exchanges.

Mission Continuous improvement in Customer Satisfaction. Improving efficiency of marketing through on-line trading in Dematerialization form. Minimizing of settlement risks. Improving efficiency of operations by providing best infrastructure. Rationalizing the transaction fees to optimum level. Implementing best quality standards and testing in tune with trade practices. Improving facilities for structured finance. Improving quality of services rendered by suppliers. Promoting awareness about on-line features trading services of NMCE across the length and breadth of the country. Turn over of the Indian commodity futures market
Turnover on Commodity Futures Markets (Rs. In Crore) Exchange 2003-04 2004-05 FIRST Half

NCDEX NBOT MCX NMCE

ALL EXCHANGES

1490 53014 2456 23842 129364

54011 51038 30695 7943 170720

Volumes in Commodity Derivatives Worldwide

29

Anagram

ANAGRAM STOCK BROKING LIMITED Anagram Stock broking, a firm is part of the Rs. 2,000 core Lalbhai Group. Anagram is a member of the National Stock Exchange (registration number INB--230597630). Ever since its foundation in 1993, Anagram Securities has always focused on the needs of the retail client. Last year, billings crossed Rs.17, 000 core with around 5,000 people making their trades through Anagram. The firm has its roots in Western India especially Gujarat where it is the biggest player. But it has expanded considerably. The investment philosophy of Anagram focuses primarily on recommending purchases in financially sound companies at reasonable market prices. The firm also recommends sales of companies which are above the sales price targets or whose business prospects are poor. Anagram does no proprietarily trading and manages no mutual funds, nor is it interested in corporate finance. They believe in offering advice that is completely untainted with ulterior motives. There are no sweetheart deals with clients pressed to buy stocks simply because the firm has taken a position or

30

Anagram
lent money to a company. The only relationships at Money pore will be those that citizens choose to forge. Anagram realizes that, every individual is unique in terms of his investment time horizon, objectives, personal financial situations, level of interest and inclination in the investment decision taking process and last but the most important, his risk taking ability. Although it is hard to beat the level of absolute customization, the firm has attempted to individualize, as much as possible. A team of highly skilled analysts and experienced Investment professionals constantly monitor the potential investment in companies that can be traded (buy and sell) on the basis of analytically derived risk/return ratios. The companies, generally, are selected on the basis of many quantitative and qualitative benchmarks. These efforts direct and prevent permanent loss of capital and to make absolute returns over time with a minimal amount of business risk. Anagram is confident that through this process, over a three-year period, the investment results will be superior to any market index. The portfolio, however, may fluctuate in the short run, as the investment decisions will be guided by business prospects and not by short-term market movements. This process is expected to be well suited to the needs of investors. Anagram foresees its role as that of an unbiased information provider and advisor attempting to empower individuals to take investment decisions and styles that suit them. Our selection of companies reflects this many of the companies that we have recommended for investment are providers of goods and services that touch the every day life of most of us. Our belief is that the comfort level of investing in such companies, therefore, would be very high.

31

Anagram

GOLD PROJECT
INTRODUCTION a) b) c) d) e) f) g) h) i) GOLD, OBJECTIVE & SPECIFICATION HISTROY OF GOLD & GOLD TRADING PRODUCTION OF GOLD DEMAND & CONSUMPTION OF GOLD USES OF GOLD MOTIVES OF HOLDING GOLD WHY CENTRAL BANKS HOLD GOLD WORLD LARGEST GOLD HOLDING GOLD AS A TOOL- HEDGING, PORTFOLIO, MEDIMUM OF EXCHANGE, SAVINGS & INVESTMENT j) THE WASHINGTON AGREEMENT k) LIMITATION OF STUDY ANALYSIS OF STUDY a) ANALYSIS CONTRACT 5 JUNE, 2005 (FUNDAMENTAL & TECHNICAL ANALYSIS) -5 AUGUST 2005 ( ,, ) -5 OCTOBER 2005 ( ,, ) SUGGESTION AND RECOMMEDATION 32

Anagram
I. FUNDAMETAL FATORS RELATIONSHIP OF GOLD
a. DOLLAR AND OTHER CURRENCIES b. WITH INFALTION AND CRUDE OIL c. INTEREST RATE & DEFICIT d. SUPPLY AND DEMAND FUNDAMETALS

II. OTHER FUNDAMENTAL FATCTORS III. FUNDAMENTAL FACTORS EFEECTING GOLD IN INDIA IV. TECHNICAL ANALYSIS - IMPORTANT SITUATION -CHAPTER ON OPEN INTEREST(OI) & VOLUMES NOTES TYPES OF TRADING COULD BE FOLLOWED FOR BENEFIT METHODOLOGY AND BIBLOGRAPHY FORMULAS & WEB SITES FOR REFERENCE

INTRODUCTION
The high Volatility in equity market with high-risk and the arrival of low interest rates have increased the investor presence in alternative investments such as gold. In India, gold has traditionally played a multifaceted role. Apart from being used for aurnoment purpose, it has also served as an asset of the last resort and a hedge against inflation and currency depreciation. But most importantly, it has most often been treated as an investment. Gold supply primarily comes from mine production, official sector sales of global central banks, old gold scrap and net disinvestments of invested gold. Out of the total supply of 3870 tons last year, 66% was from mine production, 20% from old gold scrap and 14% from official sector sales. Demand globally generate from fabrication (jewellery and other fabrication), bar hoarding, net producer hedging and Implied investment. Gold continues to occupy a prominent part in rural Indian economy and a significant part of the 33

Anagram
rural credit market revolves around bullion as security. India is the largest consumer of gold in the world accounting for more than 20% of the total world demand annually. According to unofficial estimates, India has more than 15,000 tonnes of hoarded gold, which translates to around $200 billion. Inspite of its predominant position, especially in the gold market where India is the largest importer, India has traditionally been a price seeker in the global bullion market. As considering the Indian growth scenario in GDP and increase importance in world economy near future, at present position India might guide the world gold economy prices. Bullion trading in India received a major fillip. Following the changes in the Gold Policy announced by the Government of India, in 1997 under exportimport Policy 1997-2002. As per the policy, scheduled commercial banks are authorized by the Reserve Bank of India (RBI) to import gold and silver for sale in domestic market without an Import license or surrendering the Special Import License (SIL). Bullion is imported into India by banks and four designated trading agencies acting as canalizing agents and consignees for overseas suppliers, who in turn sell to domestic wholesale traders, fabricators, etc. The price risk is borne either by the fabricator or the retail consumer. The wholesale traders, fabricators and investors do not have any effective tool to hedge their price risk in gold / silver. India being the largest consumer of gold in the world, with minimal domestic supply, the demand is met mainly from imports. Above facts certainly make the gold study, Investment in gold and good opportunity for generating revenue to the broking firm dealing in commodities trading (like Anagram stock holding corporation) in gold and other commodities. This study certainly discuss the various factors effecting gold price movements in commodity exchange especially MCX vis--vis comparing it with international prices of gold.

Objective of study
The main objectives taken up for the study on commodity-Gold are discussed as i. To study and understand the important factors effecting gold prices movements.

34

Anagram
ii. To analyse the price movement through various sources and techniques. iii. To suggest the reasons, the future conditions and situations (buy, hold and sell) on gold price movements. iv. The overall objective if this project is either to minimize the risk or maximize profit of customers of Anagram, by expecting the future gold price movement.

Gold specification while trading In MCX

Gold
Type of contract Name of commodity Ticker symbol Trading system Futures Contract Specifications Gold GLDPURMUM MCX Trading System As per directions of the Forward Markets Commission from time to time, currently (with effect from April 25, 2005) Mondays through Fridays

Hours of trading

Morning Session - 10:00 AM to 05:00 PM Pre-open Session - 05:25 PM to 05:30 PM Evening Session - 05:30 PM to 11:30 PM 10:00 AM to 02:00 PM

Saturdays

On the expiry date, contracts expiring on that day will not be available for trading after 5 PM. The Exchange may vary the above timing with due notice. Unit of trading Delivery unit Quotation/Base Value 100 gm 1 kg Rs per 10 gms of Gold with 999.9 fineness (called Pure Gold in trade circles)

35

Anagram
Tick size Price band Quality specification Quantity Variation No. Of active contracts Delivery center Opening Date Due date Position limits Premium / Discount 5 paisa Limit 10%. Not less than 995 fineness bearing a serial number and identifying stamp of a refiner approved by NCDEX. List of approved refiners will be available with the Exchange and also on its web site: www.mcxindia.com None At any date, 3 concurrent month contracts will be active. There will be a total of twelve month contracts in a year Mumbai Trading in any contract month will open on the 5th day of the month, 3 months prior to the contract month i.e. 5January 2005 contract opens on October 2004. 20th day of the delivery month, if 20th happens to be a holiday then previous working day Member-wise: Max (Rs 200 crore, 15% of Open Interest) Client-wise: Max (Rs 100 crore, 10% of Open Interest) The discount will be given for the fineness below 999.9. The settlement price for less than 999.9 fineness will be calculated as: (Actual fineness / 999.9) *Settlement price

HISTORY OF GOLD
Gold has a history of more than 7000 years in India, which can be find in religious book of Hindu, where it is considered as a metal of immense value. But looking at the history of world, gold is found at the Egypt at 2000B.C., which is the first metal used by the humans value for ornament and rituals. Gold has long been considered one of the most precious metals, and its value has been used as the standard for many currencies (known as the gold standard) in history. Gold has been used as a symbol for purity, value, royalty, and particularly roles that combine these properties. As a tangible investment gold is held as part of a portfolio by the countries as a reserves because over the long period gold has an extensive history of maintaining its value. It has in gained ground in relation to currencies owing to inflation. However, gold does become particularly desirable in times of extremely weak confidence and during hyperinflation because gold maintains its value even as fiat money becomes worthless. When the value of currency depreciate. 36

Anagram
But above all comment, it has a special role in India and in certain countries, gold Jewelry is worn for ornamental value on all social functions, festivals and celebrations. It is the popular form of investment in rural areas between the farmers after having bumper crop or after harvesting, this all factor makes India as largest consumer (18.7% of world total demand in 2004) and importer of gold due to its low production, which is negligible, and untapped gold reserves. This is due to lack of new technology in finding gold reserves and low interest shown by government in financing, encouraging for exploration programs in gold mines.

HISTORY OF GOLD TRADING: Gold future trading debuted first at Winnipeg Commodity Exchange (know is Comex) in Canada in 1972. The gold contract gain popularity among traders, led to many countries had too started gold future trading. Which include London gold future, Sydney future exchange, Singapore International Monetary Exchange (Simex), Tokyo Commodity Exchange (Tocom), Chicago Mercantile Exchange, Chicago Board of Trade (CBOT), Shanghai Gold Exchange, Dubai Gold and Commodity Exchange are some of the world Top recognized exchange, and in India, National Commodity and Derivative Exchange (NCDEX) and Multi-Commodity Exchange (MCX), and National Board of Trade (NBOT) are some Indian exchanges where Gold are traded. History of gold trading in India is dates back to 1948 with Bombay Bullion Association, which is formed by the group of Merchants.

PRODUCTION OF GOLD

37

Anagram
Till know the total gold is extracted from the mines is about $1 trillion dollar, which is accumulated in physical form is enough to built Eiffel tower. Annual gold production worldwide is about US$35 billion and by far the one of the largest-trading world commodity. Worldwide, gold mines produce about 2,464 tonnes in the year 2004 from total supplyGLOBAL GOLD PRODUCTION of 3328 tonnes but unable to meet identifiable 118 countries around the world, with the large number of development projects in these countries expected to keep production growing well into the next century. country, followed by the United States, Australia, Canada, Indonesia, Russia and others, some of this potential 50,000 tonnes of world-wide reserves.
SHARE IN WORLD PROVEN GOLD RESERVE BY COUNTRWISE
2004 (metric tons)

demand of 3497 tonnes. Gold is mined in more than

South Africa: 343 United States: 262 Australia: 258 China: 217 Canada: 129

Currently, South Africa is the largest gold producing Indonesia: 114

Ghana: 58 Tanzania: 48

countries also account for highest gold reserves from Mali: 39

Guyana: 15 Source: GFMS
PRODUCTION BY COUNTRY WISE

Australia U.S.A. 11.2% 10.0%

Russia Indonesia 6.0% 3.6% Canada 3.0% China 2.0% Others 26.2%

S.A.R. 38.0%

Mine production provides the lions share of gold supplied to the market each year 66 per cent but recycled gold gold scrap accounts for one fifth, with sales of gold by central banks and similar organizations making up the balance of 14%. Where as is most part of this production is control 38

Anagram
companies like Anglo Gold Ashanti limited (SA), Barrick gold Corporation (Canada), Gold fields, Newmont mining corporation (USA), Rino tinto, Placer dome, all this top 5 company produces around 30% of total gold production and proven gold reserves, having there exploration and mining facilities in different parts of world. Production of gold in India in negligible comparing to world gold mine production, total gold availability in India is about 5 tonnes where mines produce around 2tonnes of gold and rest is through recycled gold and scraps. Some of the Indian gold mines are Deccan gold mines, Hutti gold mines, Bharat gold mines, Kolar, Gadag, Wynad, goldfields and elsewhere.

DEMAND AND CONUMPTION OF GOLD

Gold produced from different sources and demanded for consumption in form of Jewellery, Industrial applications, Government & Central bank Investment and Private investor, which has been worth US$ 38 billion on average over the past five years in world.

Total of world gold produced is mostly consumed by different sectors are Jewellerys 80%, Industrial application 11.5% and rest of gold is used as investment purpose 8.5%.
Considering the situation in India, the demand for Gold consumption is far more ahead than its availability through production, scrap or recycled gold. Where gold production in India is only 2tonnes, where demand is 18.7% of world gold consumption, which make India Japan. a leading consumer to of gold
11.10% 42.20% 18.70%

India Italy Turkey US China

8.50% 5.30% 7.30%

followed by Italy, Turkey, USA, China, According Countries wise 39

6.90%

Japan Rest of world

Anagram
demand, the following graph shows the demand in each country. Large part constitute by Jewelry consumption with 85.56% during 2004 by Indian consumers, who seem to spend a disproportionate percentage of their disposable income on gold and gold jewelry. Gold fabrication for domestic and international market, also formed large part of business in India with 527 tonnes of gold fabricated in India in 2004, making world largest fabricator which is 60% more than its closet competitor Italy, Turkey, USA. But this Jewellery Fabrication is unable to generate much revenue, as most of its consumed in India (479 tonnes).

GOLD CONSUMPTION IN INDIA

India consumed around 18% of world Gold produced. Even though it only contribute 1.6% of Global GDP.
Traditionally, Gold has been a good safety net for Indian households. However, the sharp rise in gold imports over the last three years when the rupee has started appreciating, inflation is relatively low, banking facilities are improving And economic can confidence has picked up, is surprising say Market watchers.
(Source: -Economic Times, Article, Forget sensex, the Gold rush is on, July 18 05)

The demand is much that it consumed more than 1.5 times of US consumption of gold. Increasing by nearly 60% in 2003-04, but during this fiscal Gold imports increased by another 58%, with Import of gold and silver account around $11 billion consumption increased by 88% during March05quarter.

Uses of Gold

40

Anagram
1) Jewellery fabrication: The largest source of demand is the jewelry industry. In new years, demand from the jewelry industry alone has exceeded Western mine production. This shortfall has been bridged by supplies from reclaimed jewelry and other industrial scrap, as well as the release of official sector reserves. Gold's workability, unique beauty, and universal appeal make this rare precious metal the favorite of jewelers all over the world. India is the world's foremost gold jewellery fabricator and consumer with fabricator and consumption annually of over 600 tons according to GFMS. Measures of consumption and fabrication because are made more difficult Indian jewellery

often involves the re-making by goldsmiths of old family ornaments into lighter or fashionable designs and the amount of gold thus recycled is impossible to gauge. Estimates for this recycled jewellery vary between 80 tons and 300 tons a year. GFMS estimates are that official gold bullion imports in 2001 were 654 tons. Exports have increased dramatically since 1996, and in 2001 stood at over 60 tons. The US accounted for about one third of total official exports. Manufacturers located in Special Export Zones can import gold tax-free through various registered banks under an Export Replenishment scheme. 2) Industrial applications: Besides jewelry, gold has many applications in a variety of industries including aerospace, medicine, electronics and dentistry. The electronics industry needs gold for the manufacture of computers, telephones, televisions, and other equipment. Gold's unique properties provide superior electrical conducting qualities and corrosion resistance, which are required in the manufacture of sophisticated electronic circuitry. In dentistry, gold alloys are popular because they are

41

Anagram
highly resistant to corrosion and tarnish. For this reason gold alloys are used for crowns, bridges, gold inlays, and partial debenture. 3) Governments and central banks: The third source of gold demand is governments and central banks that buy gold to increase their official reserves. Central banks holds 28,225.4 tons, the holdings of Reserve Bank of India are only a modest 397.5 tons. 4) Private investors: Finally, there are private investors. Depending upon market circumstances, the investment component of demand can vary substantially from year to year.

Motives for holding gold The following are the main reasons why world now hold gold. 42

Anagram
Gold has worked down from Alexander's time...When something holds good for two thousand years, I do not believe it can be so because of prejudice or mistaken theory. -- Bernard Baruch Economic Security The value of currencies held in reserves, like the US dollar or the euro, depends on the economic policies of the issuing government. Gold does not suffer from defects in reserve centers policies (and may in fact even benefit from them). Nor is there any possibility of it being repudiated. Repudiation has, albeit in extreme circumstances, occurred on occasions in the past with fiat money and government securities. A sharp depreciation in the value of reserve currencies on the foreign exchange market can also amount to repudiation, entailing huge losses for foreign holders of those reserves. Physical Security Experience shows that countries quite frequently impose exchange controls affecting the free transfer of their currencies or, at the worst, total asset freezes which prevent other countries accessing their cash or securities. If external reserves are held entirely in the form of financial instruments or bank deposits denominated in the currency of a reserve center, they are vulnerable to such freezes. Where appropriately located, gold is much less vulnerable. Alan Greenspan said in 2001 "A gold still represents the ultimate form of payment in the world. It's interesting that
Germany could buy materials during the war only with gold. In extremis fiat money is accepted by nobody and gold is always accepted and is the ultimate means of payment and is perceived to be an element of stability in the currency and is the ultimate value of the currency. And that historically has always been the reason why governments hold gold."

Unexpected needs 43

Anagram
If there is one thing of which we can be certain, it is that today's status quo will not last forever. Economic developments both at home and in the rest of the world can upset individual countries plans, while global shocks can change the whole basis of the international monetary system. In short, owning gold owns an option against an unknown future. It provides a form of insurance against some improbable but, if it occurs, highly damaging event. Such events might include war, an unexpected surge in inflation, a generalized crisis leading to repudiation of foreign debts by major sovereign borrowers, a regression to a world of currency and trading blocs, or the international isolation of a country. Gold may be found to be especially valuable in periods when the world is moving from one sort of monetary system to another, such as from fixed to floating rates in the 1970s, or the earlier transition from the period when sterling was the dominant currency to one dominated by the US dollar. Confidence Public opinion polls confirm that the ordinary citizen derives considerable comfort from the fact that his country owns gold, an indestructible asset. His currency is not of course exchangeable for gold on a one-to-one basis as it was in the days of the Gold Standard, but the presence of gold nevertheless demonstrates that there is something more solid underlying the pieces of paper he uses for everyday transactions. It is notable that the European Central Bank, when it came into being at the beginning of 1999, chose to hold 15% of its centralized external reserves in the form of gold. Equally, the IMF's Executive Board, when it last held a full discussion on the role of gold in 1995, recognized that gold gave a "fundamental strength" to its own balance sheet. The same applies to gold held on an individual country's balance sheet. Diversification The addition of gold to a portfolio brings significant benefits in risk/reward terms, which do not depend on what the gold price might be at any given 44

Anagram
moment in time. This is because returns on gold tend to be negatively correlated to other financial assets. This feature was undoubtedly a factor behind the ECB's inclusion of gold. Income Gold is sometimes described as a non-income earning asset. This is untrue. While central banks are unlikely to want to use all of the gold they hold in this way, the existence of a gold lending market allows reasonable returns to be made; and gold can also be traded to generate profits.

Store of value No one should expect gold to hold its real value over short time periods (though of course it may). But, over the course of decades and even centuries, it has been shown that gold has maintained its purchasing power in real terms (see Chart). Mobilizing gold As the ultimate form of payment, gold has sometimes proved the only asset, when used either as cash or as collateral, acceptable to counter parties. Gold can indeed play a crucial and strategic role in central bank reserve mobilization in case of need.

Central banks conduct many of their gold transactions away from the public eye and it is therefore frequently difficult or impossible to learn the full story. Another use of gold is in cases of political or economic emergency.

45

Anagram
For example, in the 1981 Iranian hostage crisis, Iran refused to accept U.S. dollars in return for releasing the American hostages it held. So the U.S. transferred 50 tonnes of gold instead. As then Treasury Assistant Secretary Manuel Johnson went on to say in Congressional testimony in 1983 - and in the light of this recent experience - "The Treasury, of course, regards the US gold stock as part of our national patrimony and of value as a precautionary asset." The US government simultaneously took ownership of an equivalent quantity of Iranian gold that had been frozen at the New York Fed, so there was no net cost to US reserves. Less dramatic - but more frequent - official use has been as collateral for external borrowing. In 1974, for example, Italy secured a $2 billion loan from the Bundesbank with gold as part of a package (including the then largest ever IMF loan) to shore up its balance of payments after the 1973 oil price rise. Hit by a short-run foreign exchange crisis in 1991, India had to rely on its bullion holdings to survive. First the government swapped 20 tonnes on the Swiss market and, later, shipped a further 46 tonnes to London as collateral for a loan from the Bank of Japan. An IMF official at the time noted: "There were discussions over the weekend about a pool of central banks coming to the rescue and the first question that was asked by those sponsor banks was whether they were prepared to give their gold as collateral." In 1974 Romania was reported as using gold collateral for a loan allowing it to make external debt repayments and there were reports of similar activities in 1999. Finally, gold in the private sector can provide a vital support for public sector purposes. In the aftermath of the 1997 Asian currency crisis several countries in the region announced plans to mobilize residents' 46

Anagram
gold holdings - Malaysia, South Korea and Thailand among them. Only South Korea raised significant amounts (approximately 270 tonnes) but the avowed intent of all three was to rely on local citizens' patriotism to surrender gold in return for government bonds or local currency. The gold collected would either be placed directly in reserves, thereby adding to credibility, or sold for dollars, which could be used to repay external debt or in intervention to support their ailing currencies. WHY CENTRAL BANKS HOLD GOLD Monetary authorities have long held gold in their reserves. Today their stocks amount to some 32,000 tonnes - very similar to their holdings 50 years ago. It is sometimes suggested that maintaining such holdings is inefficient in comparison to foreign exchange. However, there are good reasons for countries continuing to hold gold as part of their reserves. These are recognized by central banks themselves although different central banks would emphasize different factors.

Diversification In any asset portfolio, it rarely makes sense to have all your eggs in one basket. Obviously the price of gold can fluctuate - but so too do the exchange and interest rates of currencies held in reserves. A strategy of reserve diversification will normally provide a less volatile return than one based on a single asset.

Economic Security Gold is a unique asset in that it is no one else's liability. It is not directly influenced by the economic (monetary and fiscal) policies of any individual country. Its status cannot therefore be undermined by inflation in a reserve currency country. Nor is there any risk of the liability being repudiated. Gold has maintained its value in terms of real purchasing power in the 47

Anagram
long run and is thus particularly suited to form part of central banks' reserves. Physical Security Countries have in the past-imposed exchange controls or, at the worst, total asset freezes. Reserves held in the form of foreign securities are vulnerable to such measures. Where appropriately located, gold is much less vulnerable. Reserves are for using when you need to. Total and incontrovertible liquidity is therefore essential. Gold provides this. Unexpected needs Gold fulfils a "war chest" role. In emergencies countries may need liquid resources. Gold is liquid and is universally acceptable as a means of payment. It can also serve as collateral for borrowing. Confidence The public takes confidence from knowing that its Government holds gold - an indestructible asset and one not prone to the inflationary worries overhanging paper money. Some countries give explicit recognition to its support for the domestic currency. And rating agencies will take comfort from the presence of gold in a country's reserves. The IMF's Executive Board, representing the world's governments, has recognized that the Fund's own holdings of gold give a "fundamental strength" to its balance sheet. The same applies to gold held on the balance sheet of a central bank Income Gold is sometimes described as a non income-earning asset. This is untrue. There is a gold lending market and gold can also be traded to generate profits. There may be an "opportunity cost" of holding gold

48

Anagram
but, in a world of low interest rates, this is less than is often thought. The other advantages of gold may well offset any such costs. Insurance The opportunity cost of holding gold may be viewed as comparable to an insurance premium. It is the price deliberately paid to provide protection against a highly improbable but highly damaging event. Such an event might be war, an unexpected surge of inflation, a generalised debt crisis involving the repudiation of foreign debts by major sovereign borrowers, a regression to a world of currency and trading blocs, or the international isolation of a country.

49

Anagram

Gold as a tool

50

Anagram
Gold is used as a tool by the investors, who ever it may be. For an instance like: I. GOLD USED AS HEDGING Economic Theory If one thing provides a hedge against another, it provides protection against movement. In the price of the other good or asset because their respective price movements reliably offset each other. Such that decline in currency price could be offset by purchasing (holding) gold. Producer, Trader and Retailer use gold for Hedging purpose as well as against floating currency, especially Dollar ($), against currency fluctuation by International traders. Who try to offset losses through hedging, safeguard themselves and finding opportunities to make profit on price Difference and fluctuation in the market. Hedging on gold Gold Hedging is being introduced with the basic purpose of safeguarding to the due Producer, to high Manufacturer, Banks and Retailer Volatility in the prices of the gold, Earning income on their gold holding and managing them more flexibly of their gold reserves and even against currencies price fluctuation. Where price volatility of gold for 22day average in the year 2004 is 14% and three-year average is around 14.1%. To reduce risk, they use the derivate market for holder to hedged, De-hedge and Re-hedge their holdings of gold.

51

Anagram
Hedging against Dollar [$] Gold is traded through out the world in terms Dollar of is Dollar, since

considered as the world local currency (nearly 85% of world trade in Dollar and forms 76% of world reserves), which is world most traded currency, because of the its features even monetary contracts signed either between the two nations or companies are represented in terms of dollar . It has been generally accepted or proved that Dollar holds inverserelationship against gold. Decline in the value of dollar against other currencies or due high inflation or decline in interest-rate, or in a situation of economic and political crisis or war or natural calamities causes the holder to shift its position from dollar to gold or to other secure security like Bonds, Treasury bill, etc., for his/their safeguard or with a intention of making profit with trading instrument in the market. This scenario can be depict by an example like, attack on World Trade Center (WTC) on sep11, 2004 shows decline in the value of dollar comparing to other world currency is a possible situation where trader or even country holding foreign reserves as dollar, switch over to holding gold than dollar.
The gold industry is of tremendous and growing importance to highly indebted countries," WGC chief executive James Burton said.

As gold is traded all over the world, it also act as Standard of payment, for the developing or underdeveloped countries against their weak currency, with that of the rest of the world, but where as due to homogeneity of gold in terms of quality make this country relief its debts and for internal development purpose by paying or selling its gold in international market, countries like Ghana, Tanzania, Mali etc are 52

Anagram
countries are depended on their gold mines are some example. By producing more gold which rose to 84% indebted countries in last decade. Which is giving a danger signal to world gold prices due to its wider availability. GOLD AS PORTFOLIO Gold used as a form of portfolio investment for Countries, Banks, Traders (like Investors as FIIs, Investment agencies, Individual in olden times, etc.,). It can be part of Investment as well as for Portfolio Diversifier.

Gold as Investment: Gold is being used as well for investment, on

the basis of expectation of rising prices in future either through past experience or a study done by major institutions for better return on investment. Generally it is considered as a minimal or risk-free investment. Gold in India is a second best preferred investment after Bank deposit by individuals, it held, either in form of Bars, Gold coins, Jewellery, etc. In rural economy of India, Gold form as security against loans.

Gold as a portfolio Diversifier:

At the World Gold Council we believe that gold is both money and a commodity, and as such it has a valuable role to play in portfolio risk diversification in Institutional Investment. On a parallel, there are some millions of people who live in countries where gold is an equally important diversifier - against fear, be it political, financial or economic. And as the recent example of the Japanese gold market has shown, these fears are not constrained solely to developing nations. (Source: The role Gold in a changing market place, Rhona Oconnell, WGC, London)

Portfolio is formed by investor, whether they are Individual, Investment institutions, Mutual Fund, etc., for getting a moderate return with having minimal risk, on such scenario including gold as portfolio investment strategy with other financial assets, which has feature of minimal fluctuation 53

Anagram
in price comparing to its rival $, equity stocks, and other metals with high liquidity. It can offer investors significant benefits by diversifying risk within a multi-asset portfolio. A study of trend on gold will possible chances of giving good or moderate return even on worst of situation as economic crisis, depreciation in currency, against a bearish stock market and many more.

II. MEDIMUM OF EXCHANGE

Gold from Ancient times has a unique feature of acting as a medium of exchange in form of Gold coins, Bars, etc. for measurement of value of goods till paper money and coins are replaced in modern time. Presently, It even act as a medium of exchange for those countries facing huge economic crisis, value of their currency is relatively low comparing to other countries they trade, During wars, Natural calamities, Relieving debts, etc., for purchase of goods and other necessities. SAVINGS AND INVESTMENT Savings in India, in form of gold is about 8-10% of total household savings (during quarter ending March, 05).

If total gold purchase till date accumulated in India is account for $200 Billion, which is more 2.5 times of total Equity market in India. Indian households own about 15,000 tones of gold, accounting for about 10% if the total worldwide stock. Annually investment in gold by Indians is account, which is termed as unproductive purpose, If it is invested in economy development, then India GDP might grow 0.3-0.4% more annually.
(Source: -Economic Times, Article, Forget Sensex, the Gold rush is on, 18 July 05)

54

Anagram
THE WASHINGTON AGREEMENT
On 26 September of 1999, 15 main Central Banks - including the European Central Bank and with the tacit support of the I.M.F. and U.S. Federal Reserve [through their continuing absence from the Gold market - in what is now called the "Washington Agreement" - made certain critical agreements. In the interest of clarifying their intentions with respect to their gold holdings, the above institutions make the following statement: 1. Gold will remain an important element of global monetary reserves. 2. The above institutions will not enter the market as sellers, with the exception of already decided sales. 3. The gold sales already decided will be achieved through a concerted program of sales over the next five years. Annual sales will not exceed approximately 400 tones and total sales over this period will not exceed 2,000 tones. 4. The signatories to this agreement have agreed not to expand their gold leasing and their use of gold futures and options over this period. 5. This agreement will be reviewed after five years. This subsequently led to the manipulation, overtrading, control on the prices of gold. The immediate impact on the market was that the price of gold moved up quickly to around $330 an ounce before slipping back again to below $300. Clearly, these agreements were intended to remove the threat of unexpected gold sales by them and provide a clear picture of what they would be doing for the next five years - at which time they would meet again to either renew, remove or adjust the agreement. This certainly gives

55

Anagram
advantage to the dollar against gold, which is only substitute to Dollar for other form of payment. (Source: authenticmoney.com)

LIMITATION OF STUDY
The study is based on the parameters of following factors. 1. It is based on Research done by authors and organizations like WGC, GFMS, News, Articles and its affect on gold. 2. Technical Analysis is done on Two methods by taking 7 & 14 day moving averages (DMA) & Relative Strength Index (RSI) and price movement, Buy and Sell signal suggests on the basis of this study characteristic of this methods. 3. The suggestion is based on the study on Fundamental and Technical Analysis such as price movement, Relationship of gold with other factors, Volumes and Open Interest (OI). 4. This analysis will be holding good for a limited time period that is based on present scenario and study conducted, future movement on gold price may or may not be similar.

56

Anagram

ANALYSIS Contract-5June05
FUNDAMENTAL PICTURE: The June05 Contract shows the weakness in the market prevailing due to end of the Bull run and strengthening of dollar in international market. Factors that moves the prices up The positive factor for increasing is crude oil prices, which has a direct correlation with gold. Weakness in dollar with it inflationary situation and decline against Euro as Gold. Support generally come in mid of contract due to high decline in prices and gold revaluation of Yuan by china lead to physical demand for gold. Increasing strength Rand (South African currency) versus world currency, certainly increase cost of production of mines.

Factors that moves down the prices IMF selling is the major factor can be considered as declining gold prices. The payroll increase in US and formidable growth in its economy. Unfavorable outlook of Europe economic growth for future put selling pressure on gold. Weak demand for physical gold from Asian countries in mid-period of contract.

57

Anagram
TECHNICAL COMMENTARY: The contract starts with a sharp decline in gold prices for the month of December and 1stweek of January after it hold for a week & continuing with negative trend set in the month of January and starts declining again for fortnight in February. The movement of curve 7&14DMA is along with gold future prices giving signs of strength to the market where bear continue their rally for this two-month on the wake of strengthening of dollar in international market and low volumes. In Next half of month, the gold future prices moved up. However from mid-February, the high crude oil prices, the increase in US trade deficit gap pushed down the US Dollar, sending the international gold prices higher.
9000 8000 7000 6000 5000 4000 3000 2000 1000 0
6800 6600 OI & VOLUMES 6400 6200 6000 5800 5600

Volume(in thousands)

OI (in thousands)

Close (Rs.)

7 per. Mov. Avg. (Close (Rs.))

1 per. Mov. Avg. (Close (Rs.)) 4

100 90 80 70 60 50 40 30 20 10 0

The

RSI

smi

same

trend was replicated at MCX too. Even Gold increases due to its high correlation with crude oil, which are increases in global market. Bulls continued their rally through out the first half of the March support coming from the tumbling dollar. However, the prices moved down during 58

Anagram
the second half of the month as result of the strengthening in the US Dollar vis--vis other reference currencies. During the period the Gold prices went up to a high of Rs.6349 per 10 gms after opening at Rs.6243. However, the later half saw prices crumbling to a low of Rs.6134 on account of strengthening dollar and low buying interest with pressure coming from high volumes and low OI. Even it could term as trader going for short selling in the market on dollar strength, this lasted for till end of June where volumes are high and short covering in market. End of the contract certainly ended in a positive note with RSI moving above 50, with rising 7DMAshowing signs of strength coming back in market.

ANALYSIS Contract- 5 August 05

FUNDAMENTAL PICTURE: The Future contract of 5August 2005 on MCX has continued with previous period bullish situation for 1st few weeks of trading. But there is pressure on the price of gold on the IMF selling and the continuam strength in the Dollar and low interest-buying rate (Gold is considered as better substitution of Dollar), where as also physical supply and demand is hardly in the market though the prices are rising, which give the signs of the gold became weaker, even though the US revival of inflationary situation which give little support to the gold prices and strengthening of Euro. Since there is high correlation between the International and Domestic gold prices (98%) so there show a trend for decline in the price of gold in India. Rise in prices of gold due to weakness of Dollar can be confirmed with rising prices of gold on 19 April05, which give the clear indication of substitution of Gold against Dollar. The moumento has not been live long due to price pressure on gold and low interest shown by traders in holding and low volumes which lead to decline in prices upto as low as price Rs.6027/10gram even though there is lower production of gold. Which even have effect of rise in interest rate by fed department of US and $ strength generally lead to profit booking in gold market. 59

Anagram
Start of June bring the strength in the gold, which is predicted in both term fundamental and technical on the basis of strong demand of the gold, increase in prices of energy, consolidation by traders with Euro strengthen against weaker $ help to come back movement of gold with increasing contracts. After two months of uptrend, weakness is shown in market as news comes of debt relief to underdeveloped nation which possible hit the gold market since US and UK opposing the payment should be made in terms of gold and selling by local in Europe due to decline in euro as forecasted its slow growth in economy for coming years and payroll increased in US has effect lead to sharp fall in price of gold. So the gold prices generally show the global effect on the world economy whether increases in purchasing by one nation like china or selling (weakness in euro) by Europe show pressure on world and even in American gold market. TECHNICAL COMMENTARY: The market has open on bullish note, which is a normal scenario. But there is price pressure on the gold due to strengthening $ and Technical correction is expected in market which decline the market further the gold prices are expected to decline since
18000 16000 14000 12000 10000 OI & Volumes 8000 6000 4000 2000 0 6300 6250 6200 6150 6100 6050 6000 5950 5900

Volume(in thousands) Close (Rs.) 14 per. M ov. Avg. (Close (Rs.))

OI (in thousands) 7 per. M ov. Avg. (Close (Rs.))

they trading below the moving average on 2 May,

100 90 80 70 60 50 40 30 20 10 0

60

rsi

SMI

Price

Anagram

which give market are price are going for further decline in coming trading days due to its weakness. Even some fundamental factors rise in interest rate in US and strengthen in Dollar give further much needed fuel to decline even the RSI curve shows overbought position, which is prevailing on the high of 80, which give selling on the gold is possible with weak volumes and Open Interest (OI). But after 20may the market start consolidating with increasing amount of volumes and creation of open interest in the market gives signal of market come back, which is generally a long buying position. Even which is indicated by moving average curve when 7DMA cut 14DMA from below and start rising. On June 18, RSI indices shown touches 80, which give signal for going short in future even accompanied with news of rise in Federal interest rates by US which can lead to strength of Dollar. The strategy for going short can be seen as profitable from the chart, below where closing price steeply decline. Where it is touching 2week low price of gold, which give a good buy signal to investor for holding for a long period time since 7&14DMA declining show weakness in gold prices for a long period of time.

61

Anagram
ANALYSIS Contract- 5 October05
FUNDAMENTAL PICTURE: The previous bull in gold prices has ended which is pressure on the price of gold, on the news of IMF selling and the continuum strength in the Dollar and low interest-physical buying keeping prices down of gold for the contract of 5 October05. The prices seen the loosing and gaining strength over a period of time. The reason could be seen as Factors that move the prices Weakness in dollar with it inflationary situation and decline against Euro as Gold is considered as better diverfication for declining dollar. The threat of Terrorist attack considerably move the gold northward as demand increases, where news could decline the currency of relative countries. Increase in physical buying and Chinese demand for gold. World forcing China for revaluation of its currency Yuan, increase demand for gold by local. Factors that move down the prices The increase payroll in US and more than expected growth of economy, brining strength in dollar. The strength in Dollar is major factor moving gold prices and demand down (up) has maximum impact on gold.

62

Anagram
Decline in Euro and Europe weak economic outlook for GDP growth rate for future, high selling on gold by this European country. But there are certain situation where either the gold shows now signs of movement in prices, like increase in prices of Tokyo had not shown any effect because of low interest shown by UK and US exchanges, which is shown with their low Open Interest and Volumes and strengthen of Euro. TECHNICAL COMMENTARY Due to the previous Bull Run, which creates a pressure on gold prices for moving down as even, the 7&14DMA are declining with the declining prices, as there is no support level. Support level is seen on 2 June when 7&14DMA are heading upward it is also confirmed by RSI curve, which is roaming around 36 shows the support as well as the bull run ahead. Such type of situation gave a Buying signal in future ahead. Which we can see in increase in OI and Volumes in the contract period. The gold price increase for a fortnight till as RSI give overbought situation on 21 June when it was at 86 basis give a strong sell signals. RSI decline up to less than 30 bases, which give weak period ahead in future (on the basis of characteristic of RSI analysis)
1600 1400 6350 6300 6250 6200

O I & Volumes

1200 1000 800 600 400 200 6/7/05 2/7/05 11/7/05 15/7/05 1/6/05 3/5/05 6/5/05 21/5/05 25/5/05 4/6/05 15/6/05 22/6/05 25/6/05 10/5/05 13/5/05 11/6/05 18/5/05 28/5/05 8/6/05 18/6/05 29/6/05
100 90 80

6100 6050 6000 5950

70 Volum e(in thousands) 60 50 40 30 20 10 0

OI (in thousands)

Close (Rs.)

7 per. M ov. Avg. (Close (Rs.))

14 per. M ov. Avg. (Close (Rs.))

63

Rsi

smi

Price

6150

Anagram
as even it could be seen through Stagnant OI & declining Volumes. After 1 July 05, given the clear indication of where 7&14DMAs declining along with RSI touches as low as 10,it indicate the signs of bearish market existence in gold trading which will last long with uneven volumes and build up of OI generally show the trader went for short position in the market with expectation on covering in future at low prices.

SUGGESTION AND RECOMMEDATION Fundamental factors: Most of the volatility in gold is affected from
fundamental factors like word currencies as Dollar, Euro, Rand; Chinese yen revaluation is also a considerable case, the relationship holding directly (indirectly) with gold is discussed later in this same topic are the main factors effecting gold world wide. Policies by Countries, Central Banks, Gold production companies have effect on demand, supply and price of gold. So, a trader(s) generally has to take closer look at such factors. Either to capitalize on such opportunities or safeguard themselves through liquidating or holding, hedging or De-hedging its respective position.

Relationship of Gold

64

Anagram
Through out Study the we have discusses the Factors affecting the price movement of Gold. We believe the main drivers of the price of gold are: investor perception of U.S. and global economic growth prospects, the strength (or weakness) of the U.S. Dollar and different currencies, the supply of gold available for sale, and physical demand from consumers and investors. Obviously, these factors are interrelated, making a simple analysis difficult to understand. The following discussion might help in understanding this relationship of Gold with A. Dollar and other currencies As we have discuss, where Dollar is considered as the world local currency with nearly 85% of world trade in $ and forms 76% of world reserves, which is world most traded currency (even Oil, gold and commodities have all been priced in US dollars since 1975 when OPEC officially agreed to sell its oil exclusively for US dollars. From 1944 until 1971, US dollars were convertible into gold by central banks in order to adjust for any trade imbalances between countries). So weakness in dollar, due to economic or political factors or unforeseen conditions gives other currency strength against dollar. Where investors view gold as a "safe haven" from dollar weakness and that any expectations of a further decline in the dollar will cause gold prices to strengthen. So it certainly gives there is an inverse relationship exist, which is formidable, between gold and dollar up to certain extent. The following figure shows the relationship of dollar and Euro with gold as basis, where decline in $ against and that any expectations of a further decline in the dollar will cause gold prices to strengthen. So it certainly gives there is an inverse relationship exist, which is formidable, between gold and dollar up to certain extent. The following figure shows the relationship of dollar and Euro with gold as basis, where decline in $ against Euro give lift to Gold price.

65

Anagram

With Inflation and Crude Oil

Generally speaking, an increasing oil price results in increasing inflation, negatively impacting the global economy, particularly oil-dependent economies such as the US, India, Taiwan, Japan, etc. which certainly effect the other commodities, which give rise to inflationary situation. An increases in price or supply disruptions will negatively impact the US economy to a greater degree with nations largely depend on US Imports like Latin American Countries and south-east Asian countries with high US GDP deficit could further decline the $ with investor holding Dollar as reserve will start selling $ which put more pressure on dollar, which already decline by 33% after 2001. Even countries like Russia, Venezuela, Arabia and some Arabian Nations are planning to Price Oil in Euro, Islamic Gold and Dinar with $, which could affect the countries to shift by transferring their reserves to other precious Metals, other currencies which might lead to free fall of Dollar. The following chart gives the clear picture of relationship of Inflation of the countries with Real Gold Prices.

66

Anagram

Above chart clearly depict the positive relationship of Gold with other countries respective to Inflation and among correlation. Over the last 50 years or so, gold and oil have generally moved together in terms of price, with a positive price correlation of over 80 percent with current pricing increasing of Oil at higher rate with analyst forecasting as $100 in coming future could take Gold to his previous high during 1970s. B. Interest Rate & Deficit GDP deficit of nations based on their Current Account balance and interest rate play a major role in deciding the movement of Gold prices. A good example could be recent news of hike in interest rate by Fed department in US for bank deposits, much better GDP growth rate than expected with low deficit leading to strengthen the Dollar with gold prices declining comparing to its strengthen Dollar. C. Supply and Demand Fundamentals Gold production is relatively flat over the last several years. Limited new production coming online in the near future, it is likely that overall mine production will continue to remain relatively stagnant over the next few years. GFMS expects that mine supply will peak in 2005 at levels only slightly higher than those seen in 2004, and then decline by 67

Anagram
approximately 30 tons per year through 2010, or roughly 1.2% per year. While additional supply could come into the market in the form of scrap gold sales, which may be inspired by recently higher gold prices, it is doubt these sales would materially impact gold supply going forward. Recent data suggests confirms this, suggesting that new scrap sales are not yet a major contributing factor to supply growth. A wildcard in the demand/supply equation is the effect of central bank sales. According to GFMS, net gold sales by central banks has accounted for approximately 13% of the annual supply of gold over the last five years (400 tons every year from 1999) according to its Central Bank Gold Agreement (CBGA). But while in 2004, they plan revise gold selling up to 500 tones. Other Factors effecting gold a) Government(s) policies towards gold. b) War, Famines or Drought other natural calamities which increased (decreases) the demand and price of gold. c) Economic or Political crisis in producing countries.

d) Lockouts on major gold mines producer.

But under certain situation, the relationship of fundamental factors doesnt compile with relationship or react in situation as it should be like in where both dollar and gold price is increase, cured oil increase but gold is reacting after some days of trading, etc such situation may arise but after some time it will come to it normal scenario. FUNDAMENTAL FACTORS EFFECTING GOLD IN INDIA 1. Most of gold Consumption is account from rural areas in India. Gold demand in such region depends on Monsoon, which has direct relationship with Gold demand. Good monsoon result in good harvesting means high demand for gold. 2. Socio-culture event like Deepawali, Ugadi, Dasshera and Marriage season have much needed demand for gold.

68

Anagram
3. Lack of trust in banking system for making deposit and tradition form of savings in gold in rural areas are still being followed. 4. Appreciation (depreciation) in rupee or low inflation have minimal effect on gold consumption. 5. Macro economic factors at large as depreciation (appreciation) of Dollar, Physical demand of gold by other country(s), unforeseen conditions, etc.

Technical Analysis
Technical Analysis methods follow on this research give relative closer picture of the (expected) price movement on gold. Certainly, 7 DMA & 14 DMA form a firm base for price expectation, support and resistance level, strength and weakness in market, signal for market comeback, etc., our a period of time with inclusion of Open Interest (OI) and Volumes. Some important situation in gold closing price on MCX with Daily Moving Averages (DMA), OI & Volumes and RSI method. When closing price curve cut 7DMA & 14 DMA from above certainly give weakness in market and give sell signal. When closing price moving up and cutting (rising) 7DMA & 14 DMA from below gives strength in market and rise in price of gold in near future. 7DMA & 14 DMA act as support line on declining prices most of the time. Increasing price while stagnant DMAs curve shows weakness in market predict decline in future in gold prices. Relative Strength Index (RSI 30/70 rule): RSI Analysis also helps in tracking situation of gold future market position, (a) It give weak signal when RSI and SMI curves stay between 50 to 70 level for a long period of time. (b) It shows strength in market when it was trading above 70 levels and suggests a sell signal. (c) As the RSI and SMI curves lies in between 69

Anagram
30 to 50 levels give hold. (d) When it is at 20 and at consolidation is happening in market it gives strong buy signals. (e) SMI curve show the relationship with that of RSI curve, when SMI lying above RSI means RSI will increase or RSI lying above SMI means, commodity is overpriced and till will come closer to SMI curve. On OI & Volumes, A comprehensive study of following chapters will necessarily help and give clear picture of market, on technical analysis.
WHAT IS OPEN INTEREST

1. Total number of options or futures contracts that are not closed or delivered on a particular day. 2. The number of buy market orders before the stock market opens A common misconception is that open interest is the volume of options and futures trades. This is not correct, as demonstrated in the following example:

- On Jan 1 A, buys an option, which leaves an open, interest and also creates trading volume of 1. - On Jan 2 C and D create trading volume of 5 and there are also 5 more options left open. - On Jan 3 A, takes an offsetting position and therefore open interest is reduced by 1, and trading volume is 1. - On Jan 4, E simply replaces C and therefore open interest does not change, trading volume increases by 5 Chapeter-1 The total number of open contracts on a security applies primarily to the futures market. It is often used to confirm trends and trend reversals for futures and options contracts.

70

Anagram
What Open Interest Tells Us A contract has both a buyer and a seller, so the two market players combine to make one contract. The open-interest position that is reported each day represents the increase or decrease in the number of contracts for that day, and it is shown as a positive or negative number. An increase in open interest along with an increase in price is said to confirm an upward trend. Similarly, an increase in open interest along with a decrease in price confirms a downward trend. An increase or decrease in prices while open interest remains flat or declining may indicate a possible trend reversal. Rules of Open Interest Now, there are certain rules to open interest that must be understood and remembered. They have been written in many different publications, so here I have included an excellent version of these rules written by chartist Martin Pring in his book "Martin Pring on Market Momentum": 1. If prices are rising and open interest is increasing at a rate faster than its five-year seasonal average, this is a bullish sign. More participants are entering the market, involving additional buying, and any purchases are generally aggressive in nature. 2. If the open-interest numbers flatten following a rising trend in both price and open interest, take this as a warning sign of an impending top. 3. High open interest at market tops is a bearish signal if the price drop is sudden, since this will force many 'weak' longs to liquidate. Occasionally, such conditions set off a self-feeding, downward spiral. 4. An unusually high or record open interest in a bull market is a danger signal. When a rising trend of open interest begins to reverse, expect a bear trend to get underway. 5. A breakout from a trading range will be much stronger if open interest rises during the consolidation. This is because many traders will be caught on the wrong side of the market when the breakout finally 71

Anagram
takes place. When the price moves out of the trading range, these traders are forced to abandon their positions. It is possible to take this rule one step further and say the greater the rise in open interest during the consolidation, the greater the potential for the subsequent move. 6. Rising prices and a decline in open interest at a rate greater than the seasonal norm is bearish. This market condition develops because short covering and not fundamental demand is fueling the rising price trend. In these circumstances money is flowing out of the market. Consequently, when the short covering has run its course, prices will decline. 7. If prices are declining and the open interest rises more than the seasonal average, this indicates that new short positions are being opened. As long as this process continues it is a bearish factor, but once the shorts begin to cover it turns bullish. 8. A decline in both price and open interest indicates liquidation by discouraged traders with long positions. As long as this trend continues, it is a bearish sign. Once open interest stabilizes at a low level, the liquidation is over and prices are then in a position to rally again. Chapter-2 Volume Used in conjunction with open interest, volume represents the total number of shares or contracts that have changed hands in a one-day trading session in the commodities or options market. The greater the amount of trading during a market session, the higher the trading volume. A new student to technical analysis can easily see that the volume represents a measure of intensity or pressure behind a price trend. The greater the volume the more we can expect the existing trend to continue rather than reverse. Technicians believe that volume precedes price, which means that the loss of either upside price pressure in an uptrend or downside pressure in a downtrend will show up in the volume figures before 72

Anagram
presenting itself as a reversal in trend on the bar chart. The rules that have been set in stone for both volume and open interest are combined because of their similarity; however, having said that, there are always exceptions to the rule, and we should look at them. General Rules for Volume and Open Interest Let's summarize these with an easy-to-read chart: Price Volume Open Interest Market Rising Rising Declining Up Down Up Up Down Up Strong Weak Weak

Declining Down Down Strong So, price action increasing in an uptrend and open interest on the rise are interpreted as new money coming into the market (reflecting new buyers) and is considered bullish. Now, if the price action is rising and the open interest is on the decline, short sellers covering their positions are causing the rally. Money is therefore leaving the marketplace and is considered bearish. If prices are in a downtrend and open interest is on the rise, chartists know that new money is coming into the market, showing aggressive new short selling. This scenario will prove out a continuation of a downtrend and a bearish condition. Lastly, if the total open interest is falling off and prices are declining, the price decline is being caused by disgruntled long position holders being forced to liquidate their positions. Technicians view this scenario as a strong position technically because the downtrend will end as all the sellers have sold their positions. The following chart therefore emerges:

73

Anagram
Bullish an increasing open interest in a rising market Bearish a declining open interest in a rising market Bearish an increasing open interest in a falling market. Bullish a declining open interest in a falling market. When open interest is high at a market top and the price falls off dramatically, this scenario should be considered bearish. In other terms, this means that all of the long position holders that bought near the top of the market are now in a loss position, and their panic to sell keeps the price action under pressure. There is no need to study a chart for this indicator since the rules are the most important area to study and remember. If you are a new technician starting to understand the basic parameters of this study, look at many different charts of gold, silver, and other commodities so you can begin to recognize the patterns that develop. TYPES OF TRADING CAN FOLLOWED FOR BENEFIT The participants in the market can follow the following strategy for benefiting in the trading from different comex. Hedging: A sale of futures contracts to offset the ownership or purchase of the underlying cash commodity in order to protect it against adverse price moves; or, conversely, a purchase of futures contracts to offset the sale of the underlying cash commodity, again for protection against adverse price moves. Hedging represents a strategy by which an attempt is made to limit the losses arising due to unforeseen situation, where traders try to minimize his risk through commodity exchange markets against future price volatility.

74

Anagram
Example: - A trader either buy or sell futures initially depending upon his holding position, like the trader sell the gold in the cash market which has to be delivered after certain period of time can hedge his position by going long in the future or the purchaser of gold can go short in the future market. But it should be noted that hedging is done for same commodity for same future contract. Some trading strategy tips can be followed in hedging for benefit for trader. 1. A trader can enter into future market for intra day or for limited time period in market on the basis of information related to either gold price movement or currency (especially $) or other factors effecting gold, like in situation weakness in Dollar due to economic factor like inflation, increase in crude prices, rise or fall bank interest rate fluctuate 2. the currency, where Dollar and Gold has inverse relationship, which give advantage to trader. Trader has option of cross hedge his commodity by taking future position in other commodity like silver, which is believed that increase in price of gold has effect on silver after or before a fortnight.

3. Even a Naked Hedge can be profitable on the basis above listed factors. But it has been believed on such situation cost-of-carry is not included. Speculator: A trader who buys and sells a contract in the hope of profiting from subsequent price movements is known as a speculator. This operator, in the market takes intentionally high risk in the market in pursuit of making gain. Speculator can follow some trading strategy tips for benefit on trade. 1. Speculator can rely on the subsequent price movement like high and low on day, where he can trade by quoting highest price for writing

75

Anagram
his position and subsequently bidding for lowest price on future contract. 2. It generally followed that there is 10 to 20 minutes gap between the spot prices and future prices in the market, this gap give an opportunity to speculator where he can hold position by taking future contract and setting off at profitable note

Arbitrageurs: These are the third important participants in the commodity market, where they obtain risk free profits by simultaneously buying and selling identical or similar instruments in different markets. An arbitrageur(s) can take advantage by capitalizing on price difference prevailing between the two commodity market like between MCX and NCDEX, the mispricing create a situation, where he/she can purchase the contract at lower price in one commex and write at different commex at higher price.

76

Anagram

METHODOLOGY: 1. For daily closing prices of gold, data is collected from MCX website. 2. Theoretical information like daily News, Articles, Research papers and Reports collected and downloaded from companies website, newspapers and published books. 3. Relating the above collected information with that of gold price movement through, (DMAs & RSI method). 4. Suggestion and Recommendation are based on factors, price behavior of gold and different techniques used for analysis, which hold good in past. fundamental analysis and technical analysis

Relative strength index (RSI) formulas: The general formula for RSI is: RSI = 100 - [100/(1 + RS)]
where RS = (Avg Gain)/(Avg Loss) Avg Gain = Total Gains / n Avg Loss = Total Loss / n n = number of RSI periods

Smoothed Relative (SR) Strength: [(Previous Avg Gain * 13) + Current Gain] / 14 [(Previous Avg Loss * 13) + Current Loss] / 14 SMI=100 - [100/(1 + SR)]

77

Anagram

BIBLOGRAPHY
The study material collected from the following sources. WEB SITES VISITED www.mcxindia.com www.ncdex.com www.gold.org www.financialexpress.com www.google.co.in 2001 www.authenticmoney.com www.kitco.com (for daily news) www.gnfc.com www.lind-waldock.com www.investopedia.com www.answers.com www.wikemcypodia.com www.bulliondesk.com ARTICLES The Gold, Oil and US Dollar Relationship (www.bms.inc.ca) Taylor On Gold, Markets & Deflationary Spiral (Ray Taylor) Executive Summary of C.H. Lawrence Why Indian Love Gold (Sunil Madhok) 78 (Tata Mac-Graw hill) NCFM (NSE Study material) Financial Markets (ICFAI) Futures & Options BOOKS Indian Financial Market NEWS PAPERS Economic Times Business Standard

Anagram
Forget Sensex, the Gold rush is on (Economic Times) Indian commodity exchange expects volumes to zoom (Business line) Gold gains in Asia on dollar dip, physical buying, strong euro vs $( ,, ) Taylor On Gold, Markets & Deflationary Spiral (Jay Taylor)

79